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The section 301 Unfair Trade complaint filed by the United Steel Workers against China this week, brought to the fore a multitude of Chinese policies and programs that disadvantage China’s trading partners and that appear to be in conflict with China’s undertakings in the WTO, IMF, and other international institutions. These include direct and indirect subsidies for exports, chronic currency manipulation aimed specifically at achieving trade surpluses, dumping of excess production in foreign markets, restriction of access to certain markets to only Chinese producers, and making market access conditional on investment in and transfer of technology to China.

However, one thing the suit does not mention is the critical issue of sovereign investment. Earlier this year, for instance, China’s fourth largest steel producer, Anshan Iron & Steel Group, announced plans to buy a controlling stake in U.S. Steel Development Co. and to build five new mills with the first creating 120 jobs in Mississippi, one of our most economically depressed states.

Superficially this looks like one of the benefits of globalization. Chinese investment comes to America and creates jobs where there are none. What could be better than that? How could anyone find anything wrong with it?

Well, the first thing you should know is that Anshan is a state owned enterprise of China which means that it receives a wide range of subsidies and preferences unavailable to private producers and that its cost of capital is far below that of non-state actors. Secondly, as a result of these subsidies and incentives, China has built more steel capacity than the rest of the world combined – some 700 million tons. That is far more than China needs with the result that the excess production is dumped in foreign markets at prices far below cost and far below prevailing prices in China. The result is that the United States and other steel producing countries have been forced to shutter mills, lay off workers, and reduce R&D on advanced steel products. And this has occurred not as the result of free market forces but as the result of the targeted industrial policies and subsidies to state owned enterprises of China.

Not surprisingly, a backlash has arisen in the United States, Europe, India, and elsewhere. To counter this, the Chinese government has developed a “go-abroad” strategy aimed at acquiring foreign companies (and their technology) as a way of bypassing trade laws, acquiring political influence abroad (especially in the U.S. Congress), and disciplining foreign competitors while gaining further control of foreign markets. The proposed Anshan investment is part of this strategy.

At the heart of the problem is an ideological struggle between an America committed to laissez faire free trade and investment and neo-mercantilist China and other countries (Taiwan, Germany, Japan) that use a full array of targeted subsides and protectionism to breed national champions in what are designated as strategic industries – autos, computers, steel, electronics, aircraft, and more.

Until Washington faces fully up to this struggle, the U.S. economy will not fully recover.

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